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Hardy investors are seeking a way to grow their money
Jan 3rd 2015 – The Economist

In the next 40 years, humans will need to produce more food than they did in the previous 10,000 put together. But with sprawling cities gobbling up arable land, agricultural productivity gains decreasing, and demand for biofuels increasing, supply is not keeping up with demand. Clever farmers, scientists and entrepreneurs are bursting with ideas. But they need money to make this jump.

Financiers more often found buying and selling companies have cottoned on to the opportunity. Farm gates have traditionally been closed to capital markets: nine in ten farms are held by families. But demography is forcing a shift: the average age of farmers in Europe, America and New Zealand is now in the late fifties. They often have no successor, because offspring do not want to farm or cannot afford to buy out family members. In addition, adopting new technologies and farming at ever-greater scale require the sort of capital few farmers have, even after years of bumper crop prices.

Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards. Investors who are keen on even bigger risks and rewards flock to places such as Brazil, Ukraine and Zambia, where farming techniques are often still underdeveloped and potential productivity gains immense.

Farmland has been a great investment over the past 20 years, certainly in America, where annual returns of 12% caused some to dub it “gold with a coupon”. In America and Britain, where tax incentives have distorted the market, it outperformed most major asset classes over the past decade, and with low volatility to boot (see chart). Those going against the grain warn of a land-price bubble. Believers argue that increasing demand and shrinking supply—as well as urbanisation, poor soil management and pressure on water systems that are threats to farmland—mean the investment case is on solid ground.

It is not just the asset appreciation and yields that attract outside capital, says Bruce Sherrick of the University of Illinois at Urbana-Champaign: as important is the diversification to portfolios that farmland offers. It is uncorrelated with paper assets such as stocks and bonds, has proven relatively resistant to inflation, and is less sensitive to economic shocks (people continue to eat even during downturns) and to interest-rate hikes. Moreover, in the aftermath of the financial crisis investors are reassured by assets they can touch and sniff.

Some are already getting their boots dirty. In 2009 Hassad, part of Qatar’s sovereign-wealth fund, asked Bydand Global Agriculture to buy nearly 50 farms in Australia and merge them into a single investment portfolio. Terrapin Palisades, a private-equity firm, bought a dairy company and some vineyards and tomato fields in California, and converted all to grow almonds, whose price has soared as the Chinese have gone nuts for them. Such conversions require up-front capital and the ability to survive without returns for years.

The private-equity approach can take the form of simple improvements, such as changing irrigation from antiquated dykes and canal networks to automatic spray systems: these are the equivalent of picking low-hanging fruit. Pricey robots can boost milk per cow by 10-15%. Using “big-data” analytics to plant and cultivate seeds can push crop yields up 5%. “This is an industry where the gap between the top and bottom quartile is greater than anywhere else,” says Detlef Schoen of Aquila Capital, an alternative-investment firm.

And yet the 36 agriculture-focused funds, with $15 billion under management, pale in comparison to the 144 funds focused on infrastructure ($89 billion) and 473 targeting real estate ($163 billion), according to Preqin, a data provider. TIAA-CREF, an American financial group, is a market leader with $5 billion in farmland, from Australia to Brazil, and its own agricultural academic centre at the University of Illinois. Canadian pension funds and Britain’s Wellcome Trust are among those bolstering their farming savvy.

Most investors are put off by the sector’s peculiar risks and complexities. Weather, commodity prices, soil health, water access, dietary fads and animal health are not the forte of the average pension-fund investment officer. Political risks abound: cash-strapped governments in Europe and America may (belatedly) get around to cutting farm subsidies. In poor countries, land titles may give outsiders dubious protection—if those countries even allow foreign ownership of land in the first place.

Some liken the sector to real estate and infrastructure 20 years ago. It lacks indices, consultant reports and track records. But unlike skyscrapers or pipelines, farming offers few of the multi-billion-dollar deals that are needed to entice mega-investors.

For more money to flow in, financiers and farmers will have to learn a lot more about each other. Money managers need to get their hands dirty and find out more about crops. Only a handful have the expertise needed; farmers gleefully share stories of Wall Street types wondering how chicks are planted. And farmers can do more to attract capital, for example by seeking out financial deals where investors’ incentives are aligned with their own, such as through joint ventures.

Investors need to separate the wheat from the chaff, too. Farm investing requires patience; it is ill-suited to flipping and trading. But those willing to climb over the barriers could reap big rewards. The investment thesis is as simple as they come, as Mark Twain realised long ago: “Buy land, they’re not making it any more.”

From his office on Broad Street in lower Manhattan, Jeff Notaro oversees a modest portfolio consisting mainly of dirt. Specifically, Notaro’s Black Sea Agriculture fund invests in farmland in northeastern Bulgaria, near the Black Sea. The $1.5 million fund buys prime agricultural land and leases it back to local farmers.

Notaro is riding a growth market. Since 2004, Bulgarian farmland has been appreciating at an average annual rate of 19 percent. Yet Bulgarian land is still cheap compared to the United States. The average price per acre for good-quality land is $1,850 in Bulgaria versus $5,000 an acre in Kansas.

Land along the Black Sea coast commands higher prices because it’s especially fertile and also close to deep-water ports. Black Sea wheat land costs $4,300 an acre on average but yields an average of 71 bushels of wheat an acre, compared with 42 bushels an acre in Kansas. “That’s about half the cost per acre on a yield basis,” Notaro said.

The rise in local land prices has been fueled mainly by a worldwide agricultural commodity boom that has driven food prices up by more than 100 percent since 2003, according to the Food and Agriculture Organization of the United Nations (FAO).

“More people need to get into farming; otherwise, we won’t have any food,” said commodity investor Jim Rogers, who launched the international Quantum Fund with George Soros in the early 1970s and went on to create the Rogers International Commodities Index, which tracks the performance of numerous commodities in global markets, ranging from agriculture to metals and energy products.

Rogers and Notaro belong to an increasingly active community of farmland investors hoping to profit from the world’s growing need for nourishment. “I’m still wildly optimistic about the future of agriculture worldwide,” said Rogers, who has served as an advisor and as a director to companies that hold farmland in Australia, Brazil and North America.

The outlines of the investing case for farmland are well known at this point. The global population is expected to peak at slightly more than 9 billion by 2050, up from 7 billion today. On a per capita basis, the FAO projects that the amount of arable land available will decline steadily over the next few decades, from 0.218 hectares per person today to 0.181 hectares per person in 2050.

On the demand side, much of the growth in population and food consumption will occur in the developing world. As income levels rise in developing countries, consumers there are consuming more meat. Livestock production consumes massive quantities of grain and water, spurring farmers to boost both crop yields and land under cultivation.

Soaring demand for biofuels is another significant demand factor. In the U.S., for example, ethanol production accounts for 23 percent of total corn utilization, according to the Renewable Fuels Association.

Average U.S. corn prices tripled between 2005 and 2012, from $2 a bushel in 2005 and 2006 to $6.22 a bushel in 2011 and 2012. The price surge was partly caused by a rising demand for ethanol, along with other factors, including flooding and drought, higher prices for inputs like fuel and fertilizer, rising demand for meat, and upward movement in commodity markets.
In turn, rising agricultural commodity prices have driven a 128 percent rise in average Midwest farmland values over the past decade, from $1,270 an acre in 2003 to $2,900 an acre in 2013, according to USDA figures.

(Read more: America in 25 years: Here’s what to expect)

The world’s insatiable appetite On the supply side, crop yields have been leveling off since the dramatic advances of the last few decades, starting with the Green Revolution that transformed agriculture in China, India and elsewhere in the developing world from the 1960s onward. Today 40 percent of global wheat land is experiencing either flat or declining yields, according to a 2012 article in the journal Nature Communications.

In China, local scientists recently warned that smog levels around the country have risen so high that they are blocking natural light, potentially impeding photosynthesis and creating conditions that resemble nuclear winter.

“We’re seeing land under threat globally,” said Reza Vishkai, head of specialist investments at Insight Investment Management in London. “You can raise production by increasing land under cultivation, but a lot of that land is concentrated in places like Africa and Brazil and requires huge investment to operate on a profitable basis.”

Owners of quality farmland are poised to benefit from all these trends, which explains why so many agriculture investors are bullish on land. Over the next two years, Notaro hopes to boost the size of his Black Sea Agriculture fund from $1.5 million to at least $10 million. This should put him in control of at least 5,000 acres, depending on where land prices head in the near term.

As in many emerging markets, farmland investing in Bulgaria is essentially a consolidation play. After Bulgaria’s Communist regime collapsed in 1990, the new government returned huge expanses of state-owned farmland to its pre-Communist owners. These families often inherited plots of 10 to 15 acres, too small for farmers to realize significant economies of scale.

“The small holdings, in general, are undervalued,” said Notaro. “Local farmers accumulate all these little leases and farm them with small equipment over poor roads. The Black Sea coast has some of the best topsoil in the world, but it’s not producing what it could.”

My seven year old grandson, Aidan asked me a very interesting question last night as I was tucking him into bed, “Grandma is there color in Heaven?” I said, “Of course there is color in Heaven, God would never make a place without color.” “What if he forgot and everything is black and white and the mountains weren’t green and the sky isn’t blue.” Once again I said, “God would never make a place without color.” He said, “Remember when we were in Montana and you said, this must be what Heaven looks like? When we were at the Montana ranch.” Then I had to agree, he felt relieved that I was assured that there was color in Heaven and he drifted off to sleep in less than a minute.

What is your property that you would call Heaven? What is my property that I call Heaven? To each and everyone there is that property that just makes us feel happy, or comforted, or peaceful. What is the most wonderful part of being a Real Estate Agent, is it the properties and the people or the people and the properties. Is it the dessert, the mountains, the plains? That is what makes being in Real Estate so wonderful as you work with each individual you embark on a journey to find the property for them that makes them say, “Yes, this is my Heaven.”

I was trying to figure out exactly what I would write about, calving season beginning, sheep sheering, ice fishing…and then when asked by my special little Aidan that one question my approach became clearer. The place I spoke of earlier is Half Moon Ranch in Montana, can I live there, NO! So upon evaluation I came up with this, I am the most blessed person on earth and I own a little piece of Heaven right here in North Dakota. I get to work with so many wonderful people each and every day. We have the most wonderful soil so right now I am thinking of what I can grow this year, we have warm nights to get the most out of our short growing season, and can get almost as green as Ireland! Now I say my friends, this truly must be “Heaven.”

Rural bankers see a continued improvement in farmland values, after the farmland price index fell to its lowest level ever in October. The rural economy remained neutral with crop prices on the rise, but oil prices taking a plunge. The majority of bankers surveyed believe producers will cut back on equipment purchases in lieu of decreases in expected farm income.

The Rural Mainstreet Index (RMI), an index which ranges from 0 to 100 with 50.0 representing growth neutral, was unchanged from November, remaining at 50.0. Ernie Goss, Ph.D, Economics Professor at Creighton University stated, “Lower energy and grain prices continue to restrain growth in the rural economy.”

Source: Rural Mainstreet Index Creighton University

The farmland price index improved to 38.6 from 30.0 in November. The increase moves the index to just below levels reported in August. “Much weaker crop prices continue to take the air out of the bubble in agricultural land prices. This is the 13th straight month that the index has moved below growth neutral,” said Goss. Auction and private sales activity has increased as farmers have completed the 2014 harvest. Sale prices have “comeback to earth” relative to the irrational prices some pieces were fetching earlier this year, but good farmland is still selling for $10,000 or more per acre in some areas.

Source: Rural Mainstreet Index Creighton University

The farm equipment sales index increased to 23.7 from 18.6 in November. Continuing to rebound from an all-time survey low, farm equipment sales have been the area most affected by the fall in expected farmer income.

This month bankers were asked how they expected farmers to adjust their expenses to the likelihood of lower revenues. 63.6% of the respondents believe that farmers will cut back on equipment purchases. The next most common answer was cutting cash rents, which is surprising because most if not all of the rent conversation between landlords and farmers have been completed. Other common answers included waiting to see better seed deals and purchasing less fertilizer and chemicals.

Survey

This survey represents an early snapshot of the economy of rural, agricultural and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

ONIDA, S.D.—The worst rail delays in more than a decade are impeding crop shipments in the Midwest, causing grain-storage facilities to fill up and sending pries for corn, soybean and soybean meal up sharply.

Congestion on railroad networks, now threatening to extend into a second year in the U.S. Farm Belt, is forcing some buyers to purchase additional soybean meal, used mainly in animal feed, to ensure a steady supply, analysts said.

That helped push futures prices up 11% in the past week. And soybeans and corn both jumped by around 7% as livestock and poultry operations in the eastern U.S. rushed to avoid feed shortages and speculators bid up the price of the commodities related to soy meal, analysts said.

The delays—the worst for the agriculture industry since 2002, according to Agriculture Department officials—have slowed business for grain companies in the upper Midwest that ship crops to customers who process them into feed and other products or export them overseas.

Analysts worry that unless railroad congestion abates, soybean-meal futures prices could march higher in the weeks ahead, potentially lifting some consumer prices for meat and other animal products. Any impact on baked goods or other processed foods in the U.S. is likely to be very limited, because grains tend to account for a small share of their prices.

For farmers who are able to ship their crops, last week’s commodity-price run-up offered a chance to sell at higher prices after an extended period of decline. Abundant summer rain this year nurtured what is projected to be the biggest U.S. corn and soybean crops in history. That has hammered prices: Even after last week’s surge, corn futures are down 11% since the start of the year at the Chicago Board of Trade, the main global marketplace for agricultural commodity futures. Soybean futures are down 20%.

But for other growers, the recent price gains may not help if they can’t get their product to market. At Oahe Grain Corp., a grain elevator in this central South Dakota town, business has nearly halted at what is normally its busiest time of year because railcars needed to pick up crops have been running about six weeks behind schedule.

The company’s 110-foot silver towers, with several holding hundreds of thousands of bushels of wheat, have been full for most of the past month, said Tim Luken, general manager for Oahe, which markets grain, sunflower seeds and other crops. Last week, Oahe ran out of space in its corn bins, too.

While Oahe waits for railcars to arrive, it can’t buy any more grain because there is no place to put it, Mr. Luken said. “Farmers call me every day … I’m telling people not to bring anything in.”

The rail snarls will cut grain-trading volumes to 8 million to 10 million bushels at Oahe this year, from 12 million to 15 million in a typical year, Mr. Luken said.

The transport problems are caused by several factors: Rail companies are experiencing an overall rise in demand to move goods, including consumer goods, crude oil from the shale fields of the upper Midwest, as well as increased grain from two years of bumper crops. Last year, an unusually harsh winter compounded problems by forcing shippers to run shorter, slower trains.

That overflowing demand has lifted profits for railroad companies such as BNSF Railway, owned by Warren Buffett’s Berkshire Hathaway Inc., and Canadian Pacific Railway Ltd. , the two primary railroads serving the upper Midwest. Canadian Pacific shares have soared 37% this year, while rival railroads CSX Corp. and Norfolk Southern Corp. have climbed 24% and 19%, respectively.

Rail companies have claimed progress in easing bottlenecks. BNSF earmarked $1 billion for expanded capacity along its northern U.S. tracks this year.

“We’re delivering consistently better performance than we did last year,” said John Miller, BNSF’s vice president of agricultural products, who said the biggest factor influencing grain shipment speeds this fall is the scale of the crop to be moved, rather than rail congestion.

Canadian Pacific is investing $500 million to help boost capacity and upgrade tracks in its U.S. network, Chief Executive Hunter Harrison told U.S. railroad regulators in a September letter. A spokeswoman said its fleet should be able to handle this year’s harvest, but “the entire grain supply chain must function efficiently in order for CP to continue our recent strong performance.”

A spokeswoman for CSX, which operates railroads across the East Coast, said the company is “putting all possible resources toward efficient grain service.”

A spokesman for Norfolk Southern, another major railroad operator in the eastern U.S., said “all traffic is being impacted by unexpected increased volume.”

Track congestion threatens profits for big agricultural traders and processors such as Archer Daniels Midland Co. and Cargill Inc. Logistics problems contributed to profit declines for the companies earlier this year, and Bunge Ltd. cited higher U.S. transport costs among its headwinds after its third-quarter results missed expectations last week.

The logjams have led grain companies to rely more on river barges to move goods, while others are looking at using trucks as a more expensive, but possibly more reliable, option. U.S. barge freight rates in the week ended Oct. 28 ran 60% higher than the past three years’ average, according to a USDA report.

Because grain processors and exporters face higher shipping costs for the crops they buy, grain elevators—the middlemen which gather crops from farmers for transport—are offering some growers in the upper Midwest sharply lower prices.

In South Dakota, some grain elevators are offering to buy corn for 70 to 80 cents below the December futures price, about double the normal discount of about 35 cents, according to Bob Metz, a farmer who grows corn and soybeans near Peever, S.D.

“It’s a huge hit to my balance sheet,” Mr. Metz said.

Futures markets reflect expectations for further snags. Contracts for the price of corn delivered next spring have climbed higher than December contracts. Traders say the move shows that commercial grain buyers are providing a financial incentive for farmers to store crops away for the winter rather than sell them immediately after harvest, partly due to anticipated shipping backlogs.

Corn for December delivery at the Chicago Board of Trade, the front-month contract, rose 0.7% on Friday to $3.7675 a bushel. That compares with higher prices for contracts for March ($3.8925) and May ($3.98).

The price difference “has a lot to do not just with the size of the crop, but the fear it’s not going to get loaded,” says Mike Zuzolo, president of Global Commodity Analytics & Consulting LLC.

In a modern-day stampede, billionaire execs are buying ranches for the cattle operations, game-hunting—and to entertain clients and guests. It was a showdown in New Mexico earlier this year, as two billionaires, both from Fort Worth, Texas, battled it out to buy two enormous cattle ranches.

When the dust cleared, oil, gas and real-estate investor Bobby Patton, co-owner of the Los Angeles Dodgers, had won the 174,000-acre York Ranch, spending more than the $10.9 million asking price and outmaneuvering D.R. Horton , one of the country’s largest home-building companies. In a separate deal, D.R. Horton, founded by Donald Horton, outbid Mr. Patton for the nearby 292,779-acre Great Western Ranch, closing in July for around the asking price of $59 million.

The market for large ranches is on the rebound. The recession and droughts dampened demand for wide swaths of ranch land in recent years. Dry conditions forced ranchers to sell off their herds, creating a glut that drove down cattle prices. Now, with easing drought conditions across much of the country and higher cattle prices, ranches that had been sitting on the market have started to sell. A boom in the oil and gas industry and current 2% interest rates on ranch mortgages are also fueling big land grabs.

“It’s the perfect storm,” says Sam Middleton, a Lubbock, Texas-based ranch agent who is representing Waggoner Ranch. With 510,000 acres across six counties in Texas, Waggoner Ranch is one of the largest ranches ever to go on the market. The heirs of Texas cattle baron W.T. Waggoner listed it just a few weeks ago for $725 million. Mr. Middleton and Briggs Freeman Sotheby’s International broker Bernie Uechtritz say “hundreds” of interested buyers have called about the property.

Demand is particularly strong right now for mega ranches—those with over 25,000 deeded acres and often more than 100,000 total acres listed in the $10 million to $175 million range. Deeded acres are more desirable because they’re owned outright; ranches may also include acreage leased from the state or federal government, which allows them to graze their cattle in exchange for a fee. These properties typically have cattle operations, as well as recreational assets such as hunting, fishing or hiking. Some listings include mineral rights in the sale, which offers potential revenue from oil, gas, uranium, coal or other resources.

Hall & Hall, a ranch real-estate agency that listed both the York and Great Western ranches in New Mexico, says a substantial part of its $1 billion-plus in ranch sales since 2012 has come from these larger properties. The firm has sold seven ranches bigger than 25,000 deeded acres since 2011, three times the number it sold in the previous four years.

Buyers of these mega ranches are looking for income, such as a profitable livestock operation or fees from allowing wildlife-hunting, says Jeff Buerger, a Denver-based partner with Hall & Hall. More important, they are looking for a safe, long-term investment. The value of U.S. pasture land normally grazed by livestock rose 11% in the fiscal year 2014, which ended in September, from a year earlier, after averaging about 5% yearly increases for the two years before that, according to the U.S. Department of Agriculture.

In a statement from D.R. Horton, the company said the purchase of Great Western Ranch was a “long-term investment, with no immediate plans for development. It will remain an active ranch operation and be made available for use by our key employees.”

Michael Hewatt, a member of the D.R. Horton board, says the company will use it much like it does the two large ranches it owns in Texas: as a place to entertain brokers, bankers and other D.R. Horton vendors. “It’s a perk for the people we work with,” he says. He also says the ranch is a “good investment for the long term.” Mr. Horton has also personally purchased large parcels of ranch land in Texas and New Mexico, according to public records.

Mr. Patton is more likely to use York Ranch for entertaining than for raising cattle, says Thomas G. Fitzgerald, one of the sellers. Mr. Fitzgerald says the cash flow from the cattle was “insignificant” in comparison to the value of the land. There’s also some potential hunting revenue, from $25,000 to $40,000 a year. The ranch, which has elk, mule deer and pronghorn antelope, is allocated about 14 big-game tags—which signifies the number of animals that can be harvested. A three-bedroom, two-bathroom main house and a small airplane hangar with two landing strips came with the sale. It is very much a working ranch—it’s nothing fancy, says Mr. Fitzgerald. Mr. Patton declined to comment on his plans for the ranch.

A major ranch purchase also comes with bragging rights. Many of the bigger properties are known as “legacy” ranches in part because buyers want to stake their claim in history. These ranches stand out for their size, unusual location or a unique feature, says Eric O’Keefe, editor of the Land Report, which publishes an annual ranking of the largest 100 private landowners in the country. To make that list requires owning 100,000 deeded acres or more.

Billionaire Stan Kroenke, who owns the St. Louis Rams and is majority owner of soccer’s Arsenal F.C., bought a roughly 124,000-acre ranch in 2012 near Augusta, Mont., listed for $132.5 million by the estate of William and Desiree Moore, the late co-founders of Kelly-Moore Paints. Called the Broken O Ranch, Mr. Kroenke’s purchase elevated him on the Land Report’s list of largest landowners, where he currently holds the No. 9 spot. Mr. Kroenke didn’t respond to a request for comment. Liberty Media Chairman John Malone remains at the No. 1 spot on the Land Report’s 2014 list, with 2.2 million acres. Mr. Kroenke didn’t respond to a request for comment.

Much of the action is in New Mexico. Unlike Texas and Colorado, the state still has quite a few very large properties that haven’t been broken apart. Real-estate agents estimate that New Mexico has about 30 ranches bigger than 100,000 acres of deeded land. Land prices are lower, too. New Mexico ranch land sells for $200 to $300 per acre, compared with as high as $1,000 an acre in Wyoming, Montana and elsewhere.

Ben Scott of Dimmitt, Texas-based Scott Land Co. is representing a 109,000-acre Double V ranch near Roswell, N.M., listed for $26.2 million, or $240 an acre. Double V first went on the market in 2009 but didn’t sell. It was relisted in the spring of 2013 and is currently under contract.
Caleb Matott, also a Texas-based ranch real-estate agent, in August sold the 35,000-acre Red Bluff Ranch, listed for $7 million, near Roswell, N.M. The buyers were Mr. Horton and his wife, Martha, personally—not by the company, according to public records. In marketing the ranch, Mr. Matott stressed the legacy value of the property: “To stand on the same ground that John Chisum, John Tunstall, Billy the Kid, Pat Garrett and so many more have stood, makes a man walk with a little higher step in his stride. To own a ranch of the grandeur makes a person part of history.”

Mr. Patton has another property in New Mexico: He and Mark Walter, the Chicago financier who is also a co-owner of the Dodgers, bought the 93,403-acre Double H ranch in west-central New Mexico last year through Double H Holdings LLC, which was used to buy the York ranch. The sale price isn’t public, but the Rocky Mountain Elk Foundation, a habitat-protection organization that owned the ranch, earned at least $30 million in the deal, according to Blake Henning, vice president of lands and conservation for the Rocky Mountain Elk Foundation.

Vast ranch holdings by a few individuals can cause deep resentment in the community, Mr. Henning says. Since private landowners either ban the public from hunting on the land or use outfitters to sell expensive hunts, local hunters often complain, he says.

That resentment won’t go away soon. Competition for recreational ranches, particularly by owners of thriving oil and gas companies, has picked up. There’s a shortage of supply now of the largest properties, which tend to go to the same small group of investors. “There’s a finite group of potential purchasers. We are all aware of them and what their appetites are,” says Greg Fay, founder of ranch brokerage firm Fay Ranches.

Corrections & Amplifications
Great Western Ranch closed in July for around the asking price of $59 million. A previous version of the story said the ranch had sold for more than its asking price. Also Stan Kroenke is the majority owner of soccer’s Arsenal F.C., not the sole owner. (10/27/14).

The South Dakota Game, Fish and Parks (GFP) has completed the annual pheasant brood survey and the results show a 76 percent increase in the statewide pheasant-per-mile index from 2013.

From late July through mid-August GFP surveyed 109, 30 mile-routes across the state to estimate pheasant production and calculate the pheasants-per-mile index. The survey is not a population estimate, but rather compares the number of pheasants observed on the routes and establishes trend information. Survey routes are grouped into 13 areas, based on a local city, and the index of each local city area is then compared to index values of the previous year and the 10-year average.

“With favorable weather conditions this past winter and spring, along with the availability of quality nesting habitat across the state, we are going to see an increase in this year’s pheasant population” stated Jeff Vonk, GFP Secretary. “Survey results show pheasant numbers rebounded the strongest in central South Dakota; especially in the Pierre,

(Reuters) David Fullington paid a “ridiculous” price of $13,600 an acre for a 200-acre (81 hectares) farm in Illinois within the last year and says he and his partners would probably bid again for prime land that is in tight supply, despite tumbling grain prices.

“No regrets at all,” Fullington said of the purchase of his neighbor’s land, now farmed by a son of one of his partners. “Very seldom do you get an opportunity to buy something right next door to you. There’s always a little extra value there for you.”

In the 1980s, sharp falls in corn and soybean prices hit farm incomes hard and land prices tumbled, hurting the rural economy in the world’s biggest grains producer. The pain spilled into the financial sector as defaults on loans pegged to farmland values rose.

U.S. policymakers and bankers had feared a repeat this year, but instead, U.S. farmland prices are already up 8 percent as of Aug. 1 according to the U.S. Department of Agriculture (USDA).

They expect values – especially for prime farmland – to hold near record highs even though corn and soybeans are at four-year lows.

The reason? Farming families like the Fullingtons have money from recent boom years to invest into assets they think give long-term value. Levels of debt are also lower than in the 1980s.

And after five years of record grain prices, led by corn on the back of booming biofuel demand, and export demand led by China, farmers have enough wealth to weather this fall. All time-high harvests that triggered the slide also provides a cushion as there are more crops to sell.

Government crop insurance programs, boosted again in the latest five-year farm bill signed in February, have also given grain farmers added protection.

New demand is coming in too. Livestock producers are seeking more grazing land as they rebuild herds after years of drought and are benefiting from record cattle prices.

“The agricultural sector has been highly profitable so you still have a lot of money out there, a lot of wealth,” said Nathan Kauffman of the Kansas City Federal Reserve, who oversees the bank’s quarterly survey of Plains crop land prices, which are up 6 percent this year.

DODGING THE TSUNAMI

Farmland acts as the main collateral for farm loans and amounted to $2.45 trillion or 85 percent of farmer assets in 2014, up from 79 percent in 2010, according to the USDA’s latest data. In the same period, land asset values for farmers rose 35 percent, extending a decade-long climb, interrupted only briefly in 2009 during the global financial crisis.

“I think the good properties will sell this fall,” said Jim Farrell, head of Farmers National, the largest U.S. farm management company and top auction house in the country, based in Omaha, Nebraska.

He said spring auctions saw 90 percent of properties sold on the day of auction and 95 percent in the same week.

“I don’t see that deteriorating a lot,” Farrell said.

Just two weeks ago, a farm in the country’s top crop state of Iowa fetched $14,100 per acre – just below last year’s record when corn prices were much higher, according to Randy Hertz of Hertz Farm Management in Nevada, Iowa.

“That really surprised me how strong that was,” Hertz said.

Farmland auctions take place throughout the year but autumn is the busiest season as crops are harvested and the end of the tax year looms.

Farmers make up the bulk of buyers, both to work the land themselves and as an investment to be managed or rented out.

An Iowa State University study in January showed farmers made up 80 percent of buyers of farmland in the top corn and soybean growing state, 18 percent were investors – including farmers buying land to be managed – and the remaining 2 percent were other buyers such as churches and non-profit groups. Iowa does not allow big corporations or partnerships to own land, with most farmland owned by couples or individuals.

“People talk about institutions investing in farmland but we are still a small fraction of what is happening in the marketplace,” said Jeffrey Conrad, head of investment firm AgIS Capital which advises farmland buyers and hedge funds.

Financial investors have generally been more cautious this year because of the fall in grain prices and the prospect of higher interest rates, which would make borrowing to buy farmland more expensive. But many retain a long-term bullish outlook for U.S. grain and meat as world demand, led by China, looks set to keep rising.

“You’ll definitely see downward pressure, clearly 5-10 percent you could see,” said Conrad, adding that most investors were waiting on the sidelines and while there could be some softening he expected no crash in months ahead. “If you saw any real downward pressure on values, there’s enough capital on the sidelines to support it. They will come back into the market if the values start to fall.”

Fullington said he and his partners were not ignoring lower crop prices or the outlook for interest rates to tick higher in the next 12 months as the Fed trims its bond buying.

“But that’s short term,” he said. “In the long-term personally I think there’s no better investment than farm land.”

Everyone has to eat in order to survive and the production of almost all food can be traced back to farmland around the world in some way. Demand is growing for farmland as the world’s population and global needs for food increase. What many don’t realize is that the supply of farmland is not changing, thus creating a severe imbalance in the supply and demand of farmland.

An investment in farmland over the long-term will provide a steady stream of income and capital gains due to the increasing global demand for agricultural commodities, driven by the rising world population, rapid growth in emerging markets, and continued demand for ethanol and biofuels. Demand for agricultural commodities is outpacing supply, positioning farmland for long-term appreciation.

In brief, the following factors are important in driving the fundamental investment rational for farmland investments:

• Land Scarcity – There are approximately 3.5 billion acres of arable land in the world with the potential for adding a mere 20% over the next 20 years.

• Food Demand – As incomes rise, demand for proteins will increase with corresponding increases in the need for feed grains. Demand is growing in developing countries: The USDA expected exports to rise up to as much as $167 billion in 2021 from $82 billion in 2007.

• Bio-fuels – Agriculture and energy markets are now bound together by federal mandates for renewable fuels. The USDA estimates that 40.5% of the U.S. corn crop was used for ethanol in 2011 and 43.1% was used in 2013.

• Declining Inventories Worldwide – Inventories of grains, as measured by “Stocks to Use” ratios have been trending down in many countries. In the U.S., there is a roughly 35-day supply of corn. In China, declining stocks has created the potential for increasing imports of corn.

• Low Farm Sector Debt Levels – The U.S. farm sector has a healthy Balance Sheet. Current debt to assets ratios are at 40-year lows and 78% of Iowa farmland is free of debt.

• U.S. Infrastructure – From transportation and storage networks to the stability of Government programs and the know-how at U.S. universities, the U.S. farm sector has the ability to grow and efficiently market large volumes of feed and foodstuffs.

• Inflation Hedge – Many economists expect inflation in the longer term as large federal deficits and the Federal Reserves’ easy money policy will create conditions for high inflation. Farmland is highly correlated to inflation and negatively correlated to most other financial asset classes.

• Resource Conservation – Agriculture production must be managed as a sustainable resource to feed the world’s growing population. Water is a vital resource and is a limiting factor for irrigated agriculture throughout the world.

• Sustainable Asset – Farmland improves in productivity over time when well-managed.

World Population Growth:

Approximately 7.0 billion people inhabit the earth in 2012, according to the U.S. Census Bureau, compared to 1.7 billion in 1900 and 5.8 billion in 1985. The rate of population growth is not expected to temper as the United Nations (U.N.) estimates the world’s population will likely reach 9.2 billion in 2050. The majority of population growth is expected to originate in emerging economies with developed countries remaining stable.

In order to feed the world’s growing and longer-living population, agricultural output will need to double by 2050 according to the U.N.’s Food and Agriculture Organization (FAO). This will be a daunting goal to accomplish as agricultural resources are already strained. In the last decade, agricultural output has grown by 2.4% annually. In order to double agricultural output by 2050, output must increase at 3.4% per year.

Historical grain production statistics suggest reaching this goal will be difficult. In 9 of the last 10 years, the global consumption of grain has outpaced production according to the USDA. To meet future demand, experts are predicting that global agriculture will need to produce more food in the next 50 years than what was produced during the previous 10,000 years, putting more and more pressure on future farmers and the land they use to produce our food.

Agriculture Exports:

The reason food demand is growing faster than population growth is the development of middle classes in emerging markets, due to above average GDP growth. The Brookings Institution estimates that by 2021, China’s middle class could grow to over 670 million, compared to only 150 million in 2010. Economists have long shown that as GDP rises, so does the consumption of animal protein as a percentage of diet. As emerging economies continue to develop, there will be a transfer from a grain-based diet to a protein-based diet.

Roughly half the increase in global calorie consumption in the past decade has been a result of higher meat consumption according to the FAO. On average, it takes two pounds of grain to produce one pound of chicken, five pounds of grain to produce one pound of pork, and seven pounds of grain to produce one pound of beef.

The rapid industrialization of developing markets will have serious repercussions on the demand for grain. In China alone, we may have roughly 500 million more people demanding a protein-based diet. As the world’s middle class continues to develop over the next decade, the demand for grains will grow exponentially.

Increasing Use of Biofuels:

Concerns regarding climate change and fossil-fuel dependency have led to a significant focus on renewable fuels, such as ethanol, as a replacement for high polluting carbon-based fuel sources. Ethanol is primarily manufactured from crops such as corn, wheat, and sugar cane. According to the USDA, ethanol production in the U.S. has increased from less than 3 billion gallons in 2003 to over 13 billion gallons in 2013. The Renewable Fuel Standard from the 2007 Energy Act calls for total renewable fuel to reach 36 billion gallons by 2022.

The USDA estimates that more than 40% of the U.S. corn production was used to produce ethanol in 2012. Ethanol demand is expected to stabilize and continue to consume roughly 40% of the total U.S. corn crop per year for the next decade according to the USDA. In January of 2011, the EPA approved the use of E15 gasoline for vehicles manufactured 2001 or newer. Currently, almost all gasoline in the U.S. is E10, or 10% ethanol. The increase to E15 will help the U.S. in its goal of using 36 billion gallons of renewable fuel by 2022. Ethanol exports are also steadily increasing due to growing biofuel demand from the EU and Brazil.

Agricultural Fundamentals:

Grain supplies, in the U.S. and globally, are at decade lows, driven by emerging-market demand, disappointing U.S. yields in the last three years, and demand for biofuels. Ending corn stocks to usage ratio (current inventories as a percentage of annual consumption) has declined over the last eight years from roughly 20% in 2004 to 9.9% in 2013. U.S. corn stocks declined to a roughly 35 day supply, meaning that if corn production was halted, the U.S. would run out of corn in a little over a month.

The global demand for food and rising commodities prices have driven agriculture fundamentals to the best in decades. The USDA estimates that farm income rose 29% in 2010, 51%, in 2011, and will rise by 15% in 2013, allowing farmers to reinvest their cash flows back into farmland to expand their operations.

Despite the rapid growth in agriculture over the last few years, farmers’ balance sheets remain very conservative. Strong farm income and minimal use of debt have allowed the U.S. farm sector to maintain conservative balance sheets as current debt to assets ratios are at 40 year lows. According to Iowa State University, 78% of the land in Iowa has no money borrowed against it.

Historical Returns:

Farmland, through current income and capital appreciation, has been one of the top performing investments over the last century. Over the past 100 years, farmland has only decreased in value three times: during the Great Depression, the inflation crisis of the early 1980s, and most recently during the housing crisis of 2008 and 2009.

years, historical U.S. farmland returns are one of the most attractive asset classes that compares favorably with more traditional assets such as stocks and bonds. Over the last 20 years, American farmland has provided a total return to investors of 12.4% that is a combination of appreciation and current income from cash rental contracts. Similar long-term appreciation in farmland has been experienced in Europe, South America, and Australia.

One of the most attractive attributes of farmland is the cash rental income. Since 1967, cash rents have yielded roughly 5.7%, although the yield has declined from 6.7% in 1967 to 4.1% in 2008, primarily due to the rise in farmland values. Cash rent yields have increased from the nadir in 2007 and we expect the yield to continue to approach the historical 40-year average of 5.9% as farmland incomes rise.

Conclusion:

An investment in farmland provides investors an opportunity to diversity from traditional asset classes as farmland returns have been negatively correlated with equities and bonds, and with only a modest positive correlation with commercial real estate. These characteristics make it an excellent diversification tool that can balance a portfolio and offset financial and commercial real estate market volatility.

Farmland is frequently compared to investments in gold because of its characteristic as an inflation hedge. However, unlike gold, farmland also produces stable income streams and as a consequence it has been described as “gold with yield.”

Farmland is a long-term investment that will be the key to feeding the world’s growing population. Farmland is the one ingredient in food production that cannot be replaced and is a sustainable asset that will last many generations.

Spearfish, SD (July 2014) – The editors of The Land Report (www.thelandreport.com), “The Magazine of the American Landowner,” presented their fourth annual survey of the country’s leading real estate firms specializing in land. Dakota Properties has again been selected as one of “America’s Best Brokerages” for the fourth straight year.

The “America’s Best Brokerages” list by The Land Report includes Dakota Properties for the fourth year in a row. In the Great Plains region, Dakota Properties was one of only 3 land brokers in the 4 state region selected for the list. With over $100 million in sales for 2013, and over $411 million during the past 4 years, Dakota Properties continues to be the premier leader in real estate sales for the region. Broker/Owner Jeff Garrett commented, “We would like to thank The Land Report for this recognition. It takes a lot of hard work on the part of our sales team and the support of our new and returning customers to gain this status.” Contributing to the firm’s “Best Brokerage” status are a team of seasoned land professionals, many with specialty credentials, who cover the states of South Dakota, North Dakota, Wyoming, Montana, Nebraska and Minnesota. All of the firm’s real estate agents are land professionals and are authorities on all types of real estate.

About Dakota Properties Real Estate
Dakota Properties is regarded as an authority on all types of real estate. The Dakota Properties team of real estate professionals offers private treaty and auction services through its network of 8 affiliate offices in South Dakota, North Dakota, Nebraska and Wyoming. For more information, please visit www.DakotaProperties.com.